Lease versus purchaseNorthwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing

$50,000.

The machine can be leased or purchased. The firm is in the

27%

tax bracket, and its after-tax cost of debt is

11%.

The terms of the lease and purchase plans are as follows:LeaseThe leasing arrangement requires end-of-year payments of

$11,500

over five years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for

$26,000

at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option.PurchaseIf the firm purchases the machine, its cost of

$50,000

will be financed with a five-year,

14%

loan requiring equal end-of-year payments of

$14,564.

The machine will be depreciated under MACRS using a 5-year recovery period. (See

LOADING...

for the applicable depreciation percentages.) The firm will pay

$3,000

per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its five-year recovery period.

a.Determine the after-tax cash outflows of Northwest Lumber under each alternative.

b.Find the present value of each stream, using the after-tax cost of debt.

c.Which alternative-lease or purchase-would you recommend?

Part 1

a. The after-tax cash outflow associated with the lease in years 1 through 4 is

The after-tax cash outflow associated with the lease in year 5 is

The after-tax cash outflow associated with the purchase in year 1 is $

please answer all parts.

Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $50,000. The machine can be leased or purchased. The firm is in the 27% tax bracket, and its after-tax cost of debt is 11%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires end-of-year payments of $11,500 over five years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $26,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase If the firm purchases the machine, its cost of $50,000 will be financed with a five-year, 14% loan requiring equal end-of-year payments of $14,564. The machine will be depreciated under MACRS using a 5-year recovery period. (See for the applicable depreciation percentages.) The firm will pay $3,000 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its five-year recovery period. a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. b. Find the present value of each stream, using the after-tax cost of debt. c. Which alternative-lease or purchase-would you recommend